The shareholders, led by the giant bond fund Pacific Investment Management Co., indicated for more than a year that they aimed to go after Mayer Brown, but previously refrained from identifying the firm in a class-action lawsuit against alleged perpetrators of the fraud that led to Refco's collapse. Last year, the shareholders said in court documents they expected to reach a settlement with Mayer Brown.
In their suit, filed with the U.S. District Court in Manhattan, the shareholders also listed Joseph Collins, a Mayer Brown partner, as a defendant. Mayer Brown employs about 1,400 lawyers in six countries. Collins is head of its derivatives group.
Collins wasn't available to comment Monday. In a statement, Mayer Brown said it intended to defend itself "with vigor" and is "confident of a positive resolution." It said it believes securities laws don't allow lawsuits to be brought "against an outside adviser where the company allegedly misrepresented its financial position."
Refco was once one of the biggest commodity brokerages in the United States. It collapsed in October 2005 - just two months after its IPO - amid allegations that its chief executive hid $430 million in bad debt. Federal prosecutors charged the executive, Philip Bennett, with fraud. Bennett, who was ousted from the company, pleaded not guilty. The company sold its key assets and has gone out of business.
Since then, a court-appointed official responsible for collecting funds on behalf of Refco's creditors has sued about dozen investment banks, accounting firms and other "insiders" that played a role in the company's IPO. The official, Marc Kirschner, has sought more than $1 billion in damages from those defendants, including Mayer Brown.
The Refco shareholders' allegations against Mayer Brown are similar to those in Kirschner's lawsuit. The shareholders said Refco's relationship with Mayer Brown began in 1994, when Collins brought the "Refco account" with him from a previous law firm. Because Mayer Brown billed Refco about $5 million a year, Refco was an "extremely lucrative" account.
The importance of that account led Collins to participate in a cover-up of "hundreds of millions of dollars" in bad debt at Refco, the shareholders' lawsuit said. Revealing those debts, by properly accounting for them, would have "threatened the company's survival" - and Collins' fees, the lawsuit said.
Collins became Bennett's "go-to guy" at Mayer Brown, working with him in "devising, documenting and concealing the massive fraudulent scheme that was intended to, and did, result in the false financial statements on which investors innocently relied."
"In return for tens of millions of dollars in legal fees from Refco, Collins and Mayer Brown abandoned their responsibilities as honest professionals and became willing participants in a fraudulent scheme that cost innocent investors hundreds of millions of dollars," the lawsuit said.
